Advanced economies must 'act now' to lower debt as bond yields spike: IMF

The International Monetary Fund has urged advanced economies to take immediate action to tackle soaring debt levels, as bond yields have reached multi-decade highs and central banks face pressure to raise interest rates. Global public debt is now at its highest since World War Two, with projections indicating it could surpass 100% of global gross domestic product.

Era Dabla-Norris, the IMF's deputy director for Fiscal Affairs, emphasized that countries with high debt levels must act now to create space for economic pressures, including defense spending, ageing populations, and other priorities. She noted that debt-to-GDP ratios have surged since the 2008 global financial crisis, the pandemic, and ongoing conflicts in Ukraine and Iran.

Since late February, bond yields have risen by an average of around 110 basis points, particularly on longer maturities. This surge is attributed to increased inflation expectations due to high energy prices and the Iran war, leading central banks to hike borrowing costs to maintain price stability. Dabla-Norris highlighted that the interaction between fiscal and monetary policy is more complex now due to high debt levels and shorter maturities, making existing debt an amplification mechanism for the effects of interest rate changes.

The IMF projects that worldwide, governments' interest payments are expected to climb from 2.3% of GDP in 2021 to 3.7% in 2031. In the United States alone, interest payments are projected to increase from about 2.8% of GDP before the pandemic to 5.7% in 2031, equivalent to projected expenditure on Social Security. In low-income countries, interest payments currently take up an average of 15% of tax revenues.

The solution, according to the IMF, is for governments to implement fiscal consolidation now. This means increasing primary balances more than in recent years to stabilize debt ratios. Dabla-Norris stressed that higher benchmark yields in advanced economies could also impact emerging markets by tightening global financial conditions. She stressed the importance of clear communication about the need for consolidation and the trade-offs involved, as delaying action will leave governments with less room for fiscal maneuver.